In 2022 investors rediscovered the importance of capital allocation when money is no longer free. This theme will continue to play out throughout 2023, which we see as a positive development that will sustain a healthier stock market for years if central bankers and regulators allow it. So rather than agonize about how far the Fed might go in raising rates and how soon monetary stimulus will return to propel risk assets higher, we like to focus on finding companies that are positioned to benefit from long-term trends that can support sustainable growth, that allocate capital efficiently, and whose stocks are trading at reasonable valuations. Especially now that stocks will once again face stiff competition from bonds, whose yields are approximating levels not seen in years across all durations and credit qualities. We are therefore devoting our first column of the new year to three companies MarketGrader rates highly that we think share these attractive GARP (growth-at-a-reasonable-price) characteristics.
Additionally, these companies stand to benefit from a series of top-down, secular trends that we think have multi-year horizons: the increasing addition of renewable energy to the overall energy mix that supports the continued growth of modern economies; a renaissance in domestic manufacturing in developed countries, especially the U.S., as companies prioritize resiliency and dependability over simple low-cost production; and soaring demand for the physical materials that will be needed to achieve the ambitious goals of transforming massive parts of the global economy to satisfy government, corporate, and consumer mandates.
Hudson Technologies (NASDAQ: HDSN), MarketGrader Score: 91.5
When thinking about supply chain disruptions or shortages of key industrial inputs or materials, refrigerants aren’t what immediately comes to one’s mind. For investors, refrigerant shortages might not even make the top 10 or 20 sources of concern when thinking about potential economic bottlenecks. Yet that’s exactly what U.S. households, businesses, and manufacturers might be facing in one- or two-years’ time, in no small part as a result of legislation passed by the U.S. Congress in December 2020 named the ‘American Innovation & Manufacturing (AIM) Act.’ The AIM Act directs the EPA (Environmental Protection Agency) to implement an 85% phasedown in the production and consumption of hydrofluorocarbons (HFCs) by 2035. HFCs (which combine hydrogen, fluoride, and carbon molecules) are greenhouse gasses used primarily in coolants found in refrigeration systems, which include residential air-conditioners, automotive cooling systems, and industrial refrigeration. In other words, HFCs are used, directly or indirectly, by virtually all consumers in the U.S.
In order to comply with Congress’s mandate, the EPA is counting on reclaimed refrigerants—recycled refrigerants extracted from HVACR units, processed, and recirculated back as coolants into existing units—to supplement alternatives to HFCs in supporting the phasedown. And since reclaimed refrigerants supplant the manufacturing of so-called virgin supply of HFCs, for which the AIM Act mandates a 40% reduction by 2024, companies with the capability, facilities, and logistical infrastructure to recycle HFCs stand to benefit from what will be a massive transition to alternative refrigeration technologies. Hudson Technologies, despite a tiny market capitalization of only $440 million, is the country’s largest processor and provider of reclaimed refrigerants, with a 35% share of the reclaim market, with the remaining 65% fragmented among approximately 30 other companies. The company has built a network of more than 40 supply facilities and stocking points and has three reclamation centers located strategically across the country, including on the West Coast (California), the Midwest (Illinois), and the Sunbelt (Georgia). It boasts of a roster of more than 7,000 clients, partnerships with two of the country’s largest suppliers of residential HVAC systems—Lennox International and AprilAire—and a $400 million, 10-year contract with the Department of Defense to supply refrigerants and compressed gases to military facilities, civilian agencies, and foreign ministries[1].
In addition to its unique position to fill the refrigerant supply gap created by the AIM Act, Hudson Technologies has smartly positioned itself as a “platform” business, providing customers with a recurring set of services to address their refrigeration needs. First, its so-called “R-Side” services help facilities return their refrigerant operating systems to optimal design conditions to avoid leakages and operate at maximum efficiency; second, it offers refrigerant reclamation (described above); and lastly, it sells its ‘EMERALD’ branded reclaimed refrigerant to help HVAC suppliers and OEMs comply with new government mandates.
Lastly, besides the company’s compelling qualitative narrative, its financial performance is nothing short of stellar, which helps explain why it ranks among MarketGrader’s top 10 U.S. stocks (out of more than 4,200 U.S. stocks under coverage) based on our overall grade of 91.5. The company posted and almost 50% year-over-year jump in revenue in the third quarter of 2022, while doubling its trailing 12-month sales from three years earlier. It also reported record gross margins of more than 51% in the year ended last September, although management admits such level will be difficult to maintain and aims instead for a sustainable 35% gross margin on revenues that it expects will exceed $400 million next year. It generated almost $134 million of operating income in the last 12 months, allowing it to retire $42 million in debt last year (through the September reporting period) and to generate $48 million in free cash flow in the last 12 months. Currently its debt totals only $62 million, about a quarter of reported capital, 90% of which is classified as long-term debt. The company’s shares trade at a multiple of just eight times earnings for the next 12 months and four times trailing EPS. HDSN is also a member of the Barron’s 400 Index.
Sociedad Química y Minera de Chile S.A. ADR (NYSE: SQM)
Few raw materials seem destined to play a more important, if not critical, role in shaping future technologies than lithium; and among its miners and producers, few companies are better positioned to benefit from the world’s desire—and government policies—to develop renewable sources of energy than Sociedad Química y Minera de Chile (SQM). The company is not only the second largest producer of lithium in the world but derives the bulk of its production from salars[2] in its home country of Chile, which holds over 40% of the world’s proven lithium reserves[3] (Figure 1). It is also developing a lithium project in Australia in what is known as the world’s largest hard-rock mining deposits with joint venture partner Wesfarmers (ASX: WES)[4].
Figure 1. World’s Lithium Production, 2020 and 2021, and Global Lithium Reserves
| Country | 2020 Production | 2021 Production | Reserves | % of Global Reserves |
| Chile | 21,500 | 26,000 | 9,200,000 | 41.4% |
| Australia | 39,700 | 55,000 | 5,700,000 | 25.7% |
| Zimbabwe | 417 | 1,200 | 2,700,000 | 12.2% |
| Argentina | 5,900 | 6,200 | 2,200,000 | 9.9% |
| China | 13,300 | 14,000 | 1,500,000 | 6.8% |
| United States | W* | W* | 750,000 | 3.4% |
| Brazil | 1,420 | 1,500 | 95,000 | 0.4% |
| Portugal | 348 | 900 | 60,000 | 0.3% |
| Total | 82,585 | 104,800 | 22,205,000 | 100% |
Global demand for lithium is hard to overstate given the voracious demand from electric vehicle (EV) manufacturers and makers of batteries for everything from cell phones to computers and portable electronic devices. In 2022, of 80 million cars produced, 10 million were electric. By 2030, according to industry estimates, 40 million vehicles produced will be electric vehicles, which could require as much as 1.5 million metric tons of lithium needed to manufacture the batteries that will store the energy that will power them[5]. This is equivalent to 7% of the world’s current reserves consumed in a single year. And based on the number of battery mega factories currently online or under construction globally (estimated at 115), 1.6 million metric tons of lithium will be required annually, to support their manufacturing projections. To put this amount into context, according to the U.S. Geological Survey, global consumption of lithium in 2021 was estimated to be 93,000 tons, a 33% increase from 70,000 tons in 2020, meaning that lithium consumption is expected to increase by over 1,600% in less than a decade from the demand of the world’s mega factories alone. Figure 2 illustrates the global end-use markets for lithium according to the USGS.
Figure 2. Lithium Global End-Use Markets
| Global End-Use Market | Percent |
| Batteries | 74% |
| Ceramics & Glass | 14% |
| Lubricating Greases | 3% |
| Continuous Casting Mold Flux Powders | 2% |
| Polymer Production | 2% |
| Air Treatment | 1% |
| Other Uses | 4% |
The Inflation Reduction Act (IRA), signed into law in August 2022, directed $400 billion in federal funding to support the development of clean energy in the United States, with the goal of substantially lowering the country’s carbon emissions by the end of the decade. About $43 billion in IRA tax credits are earmarked to support the manufacturing of EVs, energy-efficient appliances, and to improve the affordability of home batteries. Starting this year, qualifying EVs will be eligible for a tax credit of up to $7,500 for every new vehicle (and $4,000 per used vehicle). These incentives, along with additional tax credits for building EV manufacturing plants, turbocharged what was already a robust plan by car manufacturers to build EVs in the U.S. According to the Wall Street Journal, through November of last year, $33 billion in new factory investments had been pledged by auto and battery manufacturers, in addition to the $37 billion committed in al of 2021. This compares to $9 billion pledged in 2017[6]. However, the IRA contains more than clean energy ambitions; it seeks to redirect the manufacturing of batteries away from Asia, where most are made (China in particular), and towards American shores. For example, for EV manufacturers to unlock the full value of the EV consumer credit, “a scaling percentage of critical minerals in the battery must have been recycled in North America or been extracted or processed in a country that has a free-trade agreement with the United States. The battery must also have been manufactured in North America.”[7] Conveniently, the two countries with two thirds of the world’s reserves, Chile and Australia, have free-trade agreements with the U.S. According to BNAmericas, “Latin American countries that have a free trade agreement with the US can help US-based companies achieve the domestic content rules set to go into effect in 2024. Right now, this mainly benefits Chile.”[8]
SQM currently ranks as the third best company in Chile (out of 170 covered by MarketGrader), based on an overall score of 89.8 (out of 100). It also ranks 20th among all companies in the Materials sector globally, where MarketGrader rates 3,762 stocks. And among those with at least US $1 billion market cap, SQM ranks 9th (Figure 3).
Figure 3. Top 10 Materials Companies In the World With At Least US$1 Billion Market Cap, Ranked by MarketGrader Score
| Symbol | Name | Country | Mkt. Cap (USD) | MG Overall | 1Yr. Price Chg. |
| JOPH.JO | Jordan Phosphates Mines Co. | Jordan | $4.5 billion | 94.7 | 127.4% |
| 002460.CN | Ganfeng Lithium Group Co. | China | $21.3 billion | 93.2 | -20.8% |
| APOT.JO | Arab Potash | Jordan | $4.5 billion | 91.8 | 48.3% |
| 300390.CN | Suzhou TA&A Ultra Clean Technologies | China | $5.7 billion | 91.1 | -19.6% |
| CE2.DE | CropEnergies AG | Germany | $1.3 billion | 90.5 | 8.5% |
| 002240.CN | Chengxin Lithium Group Co. | China | $5.3 billion | 90.3 | -21.2% |
| MFPC.EG | Misr Fertilizers Production Co. | Egypt | $1.3 billion | 90.2 | 70.4% |
| 002258.CN | Lier Chemical Co. | China | $2.2 billion | 90.0 | -19.3% |
| SQM | Sociedad Quimica y Minera de Chile | Chile | $11.4 billion | 89.8 | 64.0% |
| ABUK.EG | Abou Kir Fertilizers & Chemicals | Egypt | $2.1 billion | 89.4 | 109.9% |
During the 12-months ended last September, the company generated $2.54 billion in free cash flow, a 15-fold increase from just three years ago, as it reaped the benefits of higher lithium prices and supply chain shortages around the world. Its quarterly sales alone grew 348%, year-over-year, during last year’s third quarter, while net income increased almost 1,000%. SQM now sports operating margins of almost 52%, more than twice as high as a year earlier. And despite the company’s remarkable growth streak and enviable market position, its shares trade at 6.3 times forward earnings per share, while yielding almost 7%, giving investors ample reasons to hold on to the stock while the EV story plays out, without having to place bets on any single auto maker.
EQT Corp. (NYSE: EQT)
EQT, the largest producer of natural gas in the United States, has a plan to reduce global, not just domestic, carbon dioxide (CO2) emissions at scale and in a meaningful way that does not involve windmills, solar panels, or electric vehicles: substituting the use of coal outside U.S. borders with U.S. natural gas. While to many ‘green’ investors focused on unattainable ‘net-zero’ goals and grandstanding pledges this plan might seem like a cynical attempt at marketing by a fossil fuel producer, to us it looks like one of the most realistic plans to address climate change resulting from CO2 emissions we have seen; furthermore, it is based on realistic and proven assumptions and reliant on private capital and on infrastructure and capabilities either available in the United States today or under development and ready to come online in a few years’ time. Assuming it works (and that regulators allow it), this plan will also reward EQT shareholders handsomely throughout the rest of the decade.
The problem itself is inherent in the way the mostly democratic developed world works: elected officials in the world’s advanced economies (think U.S., Europe, and Japan) have a mandate to do something domestically to mitigate climate change, which is a global phenomenon. They thus pledge to implement domestic policies and to fund solutions that address a problem that is international in nature, saddling their constituencies with taxes, mandates, and regulations that are seen as mere subsidies for emerging markets to continue doing ‘business as usual.’ Case in point, in 2022 176 GW (gigawatts) of coal plants were being built (with China adding one per week), which equates roughly to twice the coal capacity retired by the U.S. since 2005 (approximately 93 GW)[9]. In the specific case of the U.S., the world’s largest economy is responsible for less than 5 billion metric tons of CO2 emissions per year, compared to 29 billion metric tons for the rest of the world; and while between 2005 and 2020 the switch from coal to natural gas accounted for 61% of all emissions reductions within the U.S., today 50% of all international emissions are generated by the burning of coal outside U.S. borders. Put differently, between 2005 and 2019 the U.S. reduced its CO2 emissions from coal from 2.1 billion metric tons per year to 1.1 billion metric tons, while the rest of the world increased them from 9.3 billion metric tons per year to 13.7 billion metric tons. EQT’s plan is to quadruple U.S. liquified natural gas (LNG) capacity by 2030 to replace international coal at scale and at a pace that will make a real difference in CO2 emissions reductions, while also mitigating possible shortcomings and cost overruns in the ‘renewables-only’ strategy being currently pursued by the developed world.
Does this work?
The model of meaningful reductions in CO2 emissions by switching from coal to natural gas at scale is the United States, which achieved 60% emissions reductions in a decade and a half by implementing this same plan. Furthermore, natural gas power plants provide baseload energy, which is critical to complement renewable energy sources such as wind and solar, which are intermittent energy sources. This allows countries using coal as their primary source of baseload power to switch to a reliable and economic alternative. In addition to this, natural gas power plants are 50% more efficient than coal-fired power plants, meaning that two coal plants may be replaced by a single natural gas plant; and finally, a molecule of natural gas emits 50% less CO2 than coal. Based on the above, coupled with vast natural gas reserves available in the U.S., EQT estimates that if the U.S. is indeed able to quadruple its LNG export capacity by the end of the decade, this would allow international emitters to reduce CO2 emissions by an incremental 1.1 billion metric tons per year; this would be the equivalent of the combined emissions reductions attained by electrifying every U.S. passenger vehicle, powering every home in the U.S. with solar panels and battery packs and building 54,000 industrial scale windmills.
Why EQT?
Two thirds of the world’s natural gas resources are concentrated in four countries: the United States, Russia, Qatar, and Iran. Needless to say, at least two of the four are unreliable sources of energy to many natural gas consumers globally, especially in Europe. And while China and India are likely to continue consuming Russian and Iranian natural gas, from an emissions reduction perspective the outcome is still the same: the replacement, at scale, of coal-fired power plants in the world’s fastest growing emerging economies. The wild card in the plan, thus, is the deployment of additional pipelines and LNG terminals in the U.S. to ramp up the export of LNG to the rest of the world. And while meaningful LNG terminal capacity will come online in the U.S. in 2025[10], further regulatory changes are needed in the U.S. to achieve the quadrupling of supply EQT envisions, which in our view makes the stock a long-term holding. On the other hand, the company operates profitably and at scale, and is the dominant natural gas producer in the Appalachian Basin, by far the largest domestic repository of natural gas.
EQT is ranked 16th among 45 Oil & Gas Production companies listed in the U.S. and rated by MarketGrader, based on an overall score of 82.2 (out of 100). Like most other publicly traded energy producers in the U.S., following the 2020 pandemic the company has focused on maintaining a disciplined capital allocation program, reducing its total debt by 44% in the last four years, while cutting back on capital expenditures from close to $1.2 billion per quarter in Q3 2018 to $362 billion in Q3 2022. It generated almost $2.2 billion in free cash flow in the 12 months ended last September, 185% higher than three years before, while posting gross margins of 66%, operating margins of 64%, and a trailing 12-month return on invested capital of 13%, a far cry from the negative returns on capital it was posting years earlier as it invested heavily in exploration and production. The stock, which gained 55% last year, is down almost 32% from its September 2022 peak as natural gas prices have fallen around the world as the global economy has decelerated and as unseasonably warm weather has spared Europe from the direst predictions of shortages this winter. As a result of its recent drop, its Sentiment indicator has turned negative (which we always see as a positive for contrarian, value-oriented investors) and its shares trade at a mere 4.8 times next year’s estimated earnings per share. The stock also sports a 1.7% dividend yield and is a member of the Barron’s 400 Index.
[1] The Company. https://www.hudsontech.com/pdfs/investor-relations/HDSN-Investor-Deck.pdf
[2] Salars are dry lakes rich in mineral deposits; those containing sources of lithium, such as volcanic rock of high-silica composition, are mined for lithium itself. Source: https://wealthminerals.com/investors/lithium-101/
[3] United States Geological Survey; Mineral Commodity Summaries 2022 – Lithium.
[4] https://investingnews.com/daily/resource-investing/battery-metals-investing/lithium-investing/top-lithium-producers/
[5] https://www.globalxetfs.com/lithium-explained/
[6] Shift to EVs Triggers Biggest Auto-Factory Building Boom in Decades. The Wall Street Journal, January 1, 2023.
[7] The Inflation Reduction Act: Here’s what’s in it. McKinsey & Company,
[8] https://www.bnamericas.com/en/analysis/us-inflation-reduction-act-set-to-benefit-latam-lithium-miners
[9] Source: EQT, Unleasing U.S. LNG, The Largest Green Initiative on the Planet.
[10] The Natural-Gas Boom Could Bust Before Coming Back, Barron’s, November 30, 2022.
